April US inflation falls to 4.9%, MOM inflation rises

11 May 2023 , 09:40 AM

The month of April 2023 has seen inflation fall below the 5% mark for the first time in the last 2 years. At 4.9%, the consumer inflation is just 10 bps below the March 2023 levels, but the numbers are unlikely to make the Fed too pleased. It is true that consumer inflation in the US has, now, fallen 420 bps from the peak of 9.1% in June 2022; but the MOM inflation is just showing that the downsides to inflation from here may be a lot tougher.

To the credit of the Fed, it must be said that their anti-inflation hawkishness appears to have worked. For instance, inflation has fallen 420 bps corresponding to a 500 bps hike in interest rates. In the March and the May FOMC meetings, the Fed has persisted with 25 bps rate hike despite slowing GDP growth in the first quarter and the banking crisis among mid-sized banks getting more complicated. Ironically, this salutary impact on inflation should encourage the US Fed to persist with its hawkish path; but even the Fed realizes that incremental gains from these levels would be limited in terms of monetary tightening.

There has been consistent in inflation falling in the US

The fall in US inflation from the peak in June 2022 has been 420 bps in response to a 500 bps spike in interest rates. That almost appears proportional. However, the glide path has been more encouraging since yoy inflation each month has fallen progressively instead of showing sudden spikes. Since peaking at 9.1% in June 2022, consumer inflation in the US has reduced progressively to 8.5%, 8.4%, 8.2%, 7.7%, 7.1%, 6.5%, 6.4%, 6.0% and 5.0% between July 2022 and March 2023. The month of April 2023 saw a further fall in consumer inflation to 4.9%; falling below 5% for the first time in more than 2 years. If one looks at the break-up of consumer inflation in April 2023, food inflation is sharply lower, energy inflation bounced moderately and core inflation dipped by a marginal 10 bps

Clearly, the energy inflation which had dipped to negative in March 2023, continues to remain in negative, albeit there is a small bounce. This has been largely driven by gasoline prices in the US and that is worrying for the future course of inflation. It also means that the base effect benefits of inflation may be waning rapidly and, going ahead, the inflation journey would get difficult. This broadly syncs with the message given by the Fed over the last couple of meetings that the problem of inflation in the US was far from over. Even at 4.9%, the US consumer inflation still remains about 290 bps higher than the 2% eventual target for inflation that the US is looking at. The bigger challenge would be to guide inflation lower, without hitting growth and MOM inflation is not too encouraging.

Food inflation lower, but energy bounces back to positive

Even as the impact of the 500 bps Fed rate hike is manifesting in the form of 420 bps fall in inflation, Fed has hinted at more rate hikes, if necessary. For now, the Fed would remain obsessed with its 2% inflation target, unless there is a major growth disruption.

Inflation Basket Category	Apr 2023 (YOY)	Mar 2023 (YOY)	Inflation Basket Category	Apr 2023 (YOY)	Mar 2023 (YOY)
Food Inflation	7.70%	8.50%	Core Inflation	5.50%	5.60%
Food at home	7.10%	8.40%	Commodities less food and energy	2.00%	1.50%
Cereals and bakery products	12.40%	13.60%	Apparel	3.60%	3.30%
Meats, poultry, fish, and eggs	2.80%	4.30%	New vehicles	5.40%	6.10%
Dairy and related products	8.00%	10.70%	Used cars and trucks	-6.60%	-11.20%
Fruits and vegetables	2.00%	2.50%	Medical care commodities	4.00%	3.60%
Non-alcoholic beverages	9.50%	11.30%	Alcoholic beverages	4.60%	4.50%
Other food at home	10.40%	11.10%	Tobacco and smoking products	6.60%	6.90%
Food away from home	8.60%	8.80%	Services less energy services	6.80%	7.10%
Full service meals and snacks	7.20%	8.00%	Shelter	8.10%	8.20%
Limited service meals	8.20%	7.90%	Rent of primary residence	8.80%	8.80%
Energy Inflation	-5.10%	-6.40%	Owners’ equivalent rent	8.10%	8.00%
Energy commodities	-12.60%	-17.00%	Medical Care Services	0.40%	1.00%
Fuel oil	-20.20%	-14.20%	Physician Services	0.30%	0.50%
Gasoline (all types)	-12.20%	-17.40%	Hospital Services	2.90%	2.70%
Energy services	-5.90%	9.20%	Transport Services	11.00%	13.90%
Electricity	8.40%	10.20%	Motor vehicle Maintenance	13.30%	13.30%
Natural gas (piped)	-2.10%	5.50%	Motor vehicle insurance	15.50%	115.00%
Headline Consumer Inflation	4.90%	5.00%	Airline Fare	-0.90%	17.70%

Data Source: US Bureau of Labour Statistics

The table captures the break-up of the entire inflation basket. Here are some key takeaways. Firstly, food inflation has fallen across the board on a yoy basis, especially in the high protein intake products like milk, eggs, and dairy. Under energy category, weak demand and a high base effect has kept inflation in negative zone, but not as low as March.  Even the inflation in natural gas has fallen into negative in April 2023. On the core inflation front, the 10 bps fall, just about takes it back to the February level.

MOM inflation bounces back to 0.4% in April 2023

The US Bureau of Labour Statistics (BLS) reports inflation on yoy basis, as well as on MOM high frequency basis. After touching a high of 1.2% in June, MOM inflation stayed below 1% all through. However, after a spike in January and February to 0.5% and 0.4% respectively, MOM inflation cooled to 0.1% in March 2023. In April, it is back at 0.4%.

Here are key takeaways from the MOM inflation data for April 2023.

1. MOM food inflation has fallen -0.2% compared to March. In fact, 4 out of the 6 store food categories saw negative inflation with vegetables, meat and poultry falling.

    

2. Energy index bounced +0.6% MOM in April 2023 as gasoline prices bounced 3.0%. However, other energy items like natural gas and electricity were lower MOM.

    

3. Core inflation rose another 0.4% MOM in April 2023. The pressure comes from the shelter index rising 0.4% and index for rent rising by 0.6%.

What it means for Fed stance and for the RBI?

Fed has already hiked rates by 500 bps since March 2022 and headline consumer inflation is down 420 bps from the peak. Hawkishness is not only reducing inflation but also inflation expectations. The Fed in its May 2023 statement hinted that they may be close to the peak of the rate cycle, although Jerome Powell ruled out any rate cuts in the year 2023. The markets are factoring in rate cuts of 100 bps in 2023 as per the CME Fedwatch, but this divergence is a different story altogether and we shall not get into that.

What does this mean for India? Even as the RBI closely observes the Fed moves, the RBI has shown in its April 2023 policy that it is willing to chart its own course. India has two reasons for this divergence. Firstly, the fallout of the banking crisis in India has been hardly anything material, except for order flows for IT companies. However, higher rates have been certainly hurting corporate profit margins and solvency. The choice was quite clear for the RBI.

RBI still has to answer for why inflation impact is not so decisive and obvious in India as in the US. However, for now, the RBI has quietly shifted its weight towards growth engines. Already rated as the fastest growing economy for FY23 and FY24, India cannot take chances on the growth front. One positive message from the Fed statement is that the Fed may also gradually reduce its intervention in rates. That should help the RBI cause.